In the 1990s, hedge funds thrived by exploiting inefficiencies in equities, convertible bonds and derivatives until transparency and competition eroded alpha. Crypto markets are at a similar inflection point, but with one crucial difference: today’s managers can bring decades of experience to a nascent asset class.
Despite rapid growth and rising institutional interest, crypto markets remain in their adolescence. They are far less efficient than traditional financial markets. Fragmented liquidity across exchanges and high volatility create structural pricing gaps. These inefficiencies offer fertile ground for sophisticated managers to generate strong risk-adjusted returns – conditions reminiscent of hedge funds’ early days.
Consider the classic cash-and-carry trade. By buying Solana on the spot market and shorting its perpetual futures, managers can lock in an annualised yield of 8-12%. The position is market-neutral: it does not bet on price direction but exploits the gap between spot and futures pricing. Yet it is not without risk; leverage, counterparty exposure and mark-to-market volatility demand rigorous oversight.
Digital assets share another distinctive trait: returns skew to the upside and exhibit fat tails – extreme moves occur more often than expected. Limited institutional participation amplifies these dynamics, creating markets where big trends emerge suddenly. For trend-following managers, this is fertile ground. These strategies thrive on outsized moves, which helps explain why their performance in crypto has far outpaced similar approaches in traditional markets.
To highlight how crypto hedge fund strategies have delivered exceptional risk-adjusted returns similar to early hedge funds, we turned to data. Figure 1 compares the performance of Alpha Digital Fund and 3iQ Digital Growth (2020-2024) with that of an early Hedge Fund (1991-1995).
Figure 1: Comparing Risk and Return Across Strategies (2020–2024 vs 1991–1995)
|
Historical Performance |
Alpha Digital Fund (2020-2024) |
3iQ Digital Growth (2020-2024) |
Hedge Funds (1991-1995) |
|
Annualised Return |
28.5% |
80.4% |
21.5% |
|
Volatility |
7.5% |
32.3% |
4.8% |
|
Sharpe Ratio (3% risk free) |
3.4 |
2.4 |
3.8 |
|
Max Drawdown |
-1.1% |
-10.5% |
-2.6% |
|
Average Month (Up / Down) |
2.6% / -0.4% |
10.1% / -2.9% |
2.1% / -0.6% |
|
Volatility (Upside / Downside) |
6% / 4.3% |
26.7% / 17.8% |
3.2% / 3.6% |
|
Batting Average |
85% |
61.7% |
83.3% |
|
VaR (95%) / VaR (99%) |
0.5% / 0.8% |
4.8% / 7.1% |
0.6% / 1.4% |
|
Skewness / Kurtosis |
1.2 / 1.5 |
1.3 / 1.5 |
-0.2 / -0.2 |
|
Sortino Ratio (3% risk free) |
5.9 |
4.3 |
5.2 |
Source: 3iQ. All portfolio data from 2020-2024 is simulated.
Alpha Digital Fund achieved a 28.5% annualised return with minimal drawdowns, versus 21.5% for a hedge fund in 1991-1995. Meanwhile, 3iQ Digital Growth generated an eye-catching 80.4% return, albeit with high volatility (32%) and deeper drawdowns.
The takeaway? These returns are real. They reflect a market still in its formative stage, where inefficiencies create outsized opportunities. History tells us such conditions won’t last forever; they will narrow as the market matures. But for now, they reward those willing to act early.
Disclaimer:
This publication is provided for educational and informational purposes only. It does not constitute financial, investment, legal, accounting, tax, or other professional advice, and must not be relied upon as such. Nothing in this publication is intended to recommend or promote any particular product, strategy, portfolio approach, issuer, digital asset, or service offering. Readers should not interpret any discussion of specific cryptocurrencies and other digital assets, markets, or strategies as a solicitation, offer, or endorsement. The views expressed were prepared for the purpose of providing readers with general educational background information about cryptoassets and are not appropriate for other purposes. 3iQ assumes no obligation to update or revise this document to reflect new events or circumstances.
The views and examples presented are general in nature and may not be appropriate for any specific investor, client situation, or regulatory context. Readers remain solely responsible for performing their own due diligence and verifying the accuracy of any information used in their decision-making.
Cryptocurrencies and other digital assets are highly volatile, may experience significant price fluctuations, and may not be suitable for all investors. 3iQ makes no representation or warranty as to the accuracy, completeness, or timeliness of any information contained herein. All content is provided on an “as-is” basis without warranty of any kind. 3iQ shall not be liable for any loss, damage, or adverse outcome arising from the use of, or reliance on, this material.